Managerial Horizon and Corporate Labor Policies: Evidence from Fixed-Term Boards

We examine the relationship between managerial incentives and firms’ human resource policies by combining Italian social security records with newly collected data on board terms. We exploit the fact that boards of listed companies are appointed every three years as a source of variation in directors’ and top executives’ horizons. Our evidence shows that average wages cyclically decline in the last year of the board term, as managers approach the end of their tenure, consistent with executives trying to cut labor expenses and, hence, maximize profitability when they are up for reappointment. By leveraging individual administrative data, we also show that involuntary separations that occur close to the end of a board term lead to significantly worse outcomes for workers compared to involuntary separations that occur at the beginning of a board term; this result is driven by outsourcing events. These effects are not present in firms where managers are more likely to be entrenched, such as family-managed firms.